11 February 2010

China Moves To Withdraw From Risk

Telegraph (UK): China orders retreat from risky assets

China has ordered managers of its vast currency reserves to withdraw from risky dollar assets and retreat to core debt guaranteed by the US government, a clear sign that Beijing is battening down the hatches for fresh trouble on global markets.

The exact motives for China's shift of strategy are unclear. Analysts say the authorities may fear that the end of quantitative easing by the US Federal Reserve could cause risk spreads to widen sharply, triggering heavy losses. The shift in policy appears unrelated to the US spat with China over Taiwan.

The move by Beijing comes at a time when China's current account surplus is falling. This reduces reserve growth, reducing the supply of global liquidity.

Mr Redeker said this will have the paradoxical result of boosting the dollar. Flight from risk can lead to an automatic rise as hedge funds, banks, and investors across the world cut back leverage on dollar balance sheets.

"We don't think the dollar rally is going to last much beyond the first quarter because we're in a new world of rotating sovereign crises where politics matters again. It's Greece right now but it could be the UK next, and then US which has yet to take any steps at all to tackle it fiscal deficit," he said.

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